On the Problems and Prospects of Legalization of Mining in Russia

Алёна Инжеева
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The level of regulation of cryptocurrency in Russia leaves to be desired, especially in the sphere of legalization. Digital assets are far from mass popularity yet, but some crypto industry aspects already require a more definite approach on the part of the State regulator. For instance, it has to do with production of cryptocurrency. The status of mining has not been determined in Russia yet. It is not banned or permitted. There is no regulation of this activity, yet miners often face problems and attract special attention from government bodies.

There are certain questions that should be posed right now. Does mining require regulation in Russia? What do miners think about it? What problems can be solved with legalization? Experts helped us address the issues and shared their opinions with our readers.

Do Russian miners need legalization?

Regulatory issues concerning cryptocurrency are being quite actively discussed in various governmental bodies. The work has been going on for a long time and there are already first results. For instance, in February, the Ministry of Economic Development of Russia made a proposal to provide incentives for mining companies, including favorable tariffs for electricity and the issuance of permits for mining in the regions of Russia with a surplus in electricity generation. Also, from some officials of the ministry, a proposal was received that the mining of cryptocurrencies should be recognized as a type of commercial activity and taxed.

The Ministry of Energy of the Russian Federation also insists that there is an urgent need to address the regulation of mining and cryptocurrencies. Yevgeny Grabchak, Deputy Minister, has repeatedly stated this. He believes that the introduction of this industry into the legal framework will give the State an additional source of income in the form of fees for connection to power grids and electricity consumption. At the same time, the Central Bank adheres to the position that everything related to cryptocurrencies carries huge risks.

What do the miners themselves think about this? In order to find out about this, we asked some experts whether the legalization of mining is what everyone has been waiting for, or, on the contrary, the measures taken and increased control over the industry will only create problems for the miners and they will still work in the gray zone.

Vladimir Gorgadze, head of the Master's program in blockchain technologies of Moscow Institute of Physics and Technology, noted that the topic of legalizing the cryptocurrency industry had been on the agenda of almost all world regulators, and Russia was no exception. The Ministry of Finance, the Ministry of Economic Development and the Central Bank are currently discussing various bills on digital currencies. Perhaps, as a result, operations with digital currencies will be legalized in Russia through authorized platforms, i.e. the organizers of the digital currency exchange system and the digital currency exchange operators. At the moment, it is assumed that the platform will control the user's wallet.

The expert said,

“I assume that the miners are waiting for the legalization of their activities, as this will spur the development of the industry. Currently, many miners are working in terms of legislation in the gray and even black zones. This creates quite serious risks for the activity. For example, access to electricity may be limited at any time, which for large players will automatically entail a costly and process-wise complicated relocation and lead to lost profits during downtime. In addition, they run a serious risk of the confiscation of expensive equipment and prosecution of illegal business activities.”

“It is possible that some miners will continue to work in the gray zone, for large players, however, provided that it is legally possible to withdraw digital currencies into fiat funds via platforms, this will become an opportunity to transfer their activities to the legal framework. If the future law on digital currencies allows the owners of legally obtained digital funds to independently manage private keys, then this will bring the circulation of digital currencies to a qualitatively higher level.”

Alexander Nikulin, Sales Director of EMCD, the largest mining pool in Eastern Europe, confidently states that miners have been waiting for clear regulation of the industry for a long time, since they have nothing to hide and they are ready to work legally. This is because enterprises producing cryptocurrencies are rationally moving towards reducing risks. According to the expert, white hat work simplifies the activity of the miner considerably since he does not need to hide equipment or illegally connect it to electrical networks, as black miners do. Cryptocurrency mining enterprises that operate legally do not risk being fined or losing equipment during the next raid.

Stanislav Akulinkin, Financial Director of EMCD, MBA, PhD, agrees with the opinion of the previous expert. He also noted that Russian miners had been waiting for the adoption of legislation for their type of activity for several years. The need for it is huge and is covered in detail by the professional communities of miners and crypto enthusiasts. The clearer and more permissive the regulation is, the more miners will immediately switch to an open mode of operation. According to the expert, the market and its participants do not need gray schemes.

Timofey Semyonov, CEO of Intelion Data Systems, commented on the situation with mining in Russia as follows,

“A global approach to regulating the sphere has not yet been finally formed anywhere in the world, so in many countries, like in Russia, the mining and circulation of cryptocurrencies is in the gray zone, but in general we note a trend towards introducing mining into the legal framework. The legalization of mining, in our opinion, will benefit both all categories of miners and the Russian economy as a whole, provided that a fair and balanced approach to the regulation and taxation of this industry is applied.”

“The optimal solution in legalizing the industry may be the transfer of mining to an industrial framework, to specialized mining data centers operated by mining operators. We evaluate the transition to such a mining format positively, including for home miners, who may now oppose it. First of all, in this framework, the owners do not need to deal with the operational processes for the usage of the equipment on their own. It will also be possible to insure their equipment and use financial instruments to attract investments.”

Andrey Tugarin, managing partner of GMT Legal, in turn, argues that cryptocurrency mining in Russia is in dire need of legalization. This is necessary for the miners themselves, and for investors, and for society as a whole. The best option would be to approve mining legislatively and set down the basic rules of work. This will contribute to the predictability and stability of the legal status of miners. The aspects of taxation, accounting for income and expenses during mining will also be clear. The latter is especially important for the whole society because electricity costs make up a significant part of all miner expenses.

Egor Abramov, Principal of Fort Ross Ventures, also believes that the legalization of mining is a good and timely measure. According to the expert, this is the first step towards the legalization of the cryptocurrency market in the country. Such a step will allow large businesses to be actively involved in mining processes because it will be possible to legally sell these cryptocurrencies and, in fact, turn into some kind of a gold mining company. Small black hat “treasure hunters" will lose, but the industry as a whole will benefit.

Analyst Aziz Kenzhaev shared his opinion on this matter,

“I am sure that miners engaged, for example, in this activity are waiting for legalization on a large scale because no matter how pleasant it is to work and not pay taxes, there is still a risk that tomorrow they may pass a law on a ban and law enforcement officers will come and confiscate property and funds.”

Dmitry Noskov, an expert at the StormGain crypto exchange, expressed his position on whether miners need legalization of their activities as follows,

“Ideally, miners would like to continue their activities without any legalization because any government regulation will put pressure on the industry. Certainly there will be requirements for some kind of financial reporting, payment of taxes and registration.”

“Of course, the milder the requirements for them from the authorities are, the easier and more comfortable it will be for miners to engage in their activities seeking to do it in Russia, without moving to other countries. Of course, more favorable electricity tariffs would be received with enthusiasm.”

Denis Smirnov, blockchain specialist, cryptocurrency researcher, as well as a Liquidity Manager for EMCD, the largest mining pool in Eastern Europe, emphasized that the legalization of mining is a long-awaited measure that the industry had been waiting for for many years. In any business, it is always more convenient to work by clear rules of the game observed by all participants. Therefore, for the main part of the miners, who changed from home garage farms to full-fledged businesses long ago, such a move is very desirable. Naturally, a certain number of miners may continue to work in the gray zone, but the bulk of market participants will undoubtedly prefer to go into the legal framework.

Everything depends on the Regulator’s policy

The issue of legalization is rather controversial because the outcome of the situation directly depends on what specific measures will be taken by the Regulator. Many miners fear that the introduced regulation will only complicate the situation and create very unfavorable conditions for this activity in Russia. Despite the fact that many cryptocurrency miners are ready to work in the legal framework, they cannot clearly formulate their opinion on whether they need this legalization at all.

Some experts also stressed that the results of legalization could be judged after the creation and publication of relevant documents. It is also worth noting that the introduction of cryptocurrency mining into the legal framework is a difficult and slow process.

Georgy Rakhaev, a lawyer at the consulting company Trusty Consulting, noted that at that moment, most of the difficulties in legalizing mining could be divided into two large groups, those of legal difficulties and enforcement difficulties.

  • The first group includes, first of all, the lack of complete regulation of cryptocurrencies in the Russian Federation as a whole, including the problems of taxation, the difficulty of placing cryptocurrencies on the balance sheets of companies, and much more. This can be corrected by reviewing the legislation and regulations, but at the same time, documents previously adopted in this area leave a reasonable doubt as to how well the rule-making activity is aware of the very nature of cryptocurrencies.
  • In the second group, there are such problems of law enforcement as lack of legal related infrastructure, unwillingness (and informal ban) of banks to work with any cryptocurrency projects, uncontrolled interpretation of local regulations, and lack of protection of crypto assets within the legal framework. Many of the problems here are inherent in Russia as a whole and it is impossible to predict whether they can be solved locally for cryptocurrencies or whether this will require a significant change in the entire structure of control bodies.

The expert also added,

“Typically, businesses do not seek regulation for the sake of regulation. It is logical that additional reporting, taxes, and costs should carry some guarantees or benefits. That is, business is ready to pay taxes, for example, for safeguarding from illegal actions against them, for honest courts and protection of property rights. If control is established without any benefits, then the business will be prone to moving into the gray zone or migration. Mining can change its location relatively easily, so a unilateral initiative of the authorities without providing anything in return can adversely affect the development of this business in Russia.“

“Another important aspect is the economic feasibility of white hat mining: in addition to administrative and tax costs, legal mining is associated with the purchase of electricity at commercial rates. This can make mining on aging hardware unprofitable. Already, many mining farms can survive economically only on relatively affordable electricity rates.”

Aaron Chomsky, head of the investment department at ICB Fund, emphasized that mining was, in fact, a full-fledged production, where, with the help of equipment and raw materials (electricity), a full-fledged transaction processing took place within the network, during which new coins were generated. In other words, this is not trading, where it is enough to have finances and a computer, but an event that requires interaction, at least, with electricity suppliers in one form or another affiliated with the State. Not to mention the fact that miners place their equipment in areas where the authorities can come at any time either to check or seize devices. Of course, you can negotiate with local authorities or managers of energy companies, but the risks of losing business remain high. A bill that will help achieve transparency will provide for reducing the risks. This is beneficial for both businesses and the State, which will be able to control the process and receive additional money in the budget. The main thing is not to overdo it: the costs of doing business legally should not exceed the risks of doing business in the gray zone. In short, the Laffer effect should be taken into account.

Danatar Atajanov, Brand Manager of the OXLY.IO crypto platform, commented on the current situation,

“Indeed, the trend towards the adoption of cryptocurrencies and mining in Russia at the State level is becoming more pronounced. The rhetoric in the highest echelons of power boils down to permissive measures. Now it is difficult to say what these initiatives will result in. Sometimes they even seem too bold. For example, the idea of selling gas for cryptocurrencies needs a fundamental change in the country's legislation. But such courage pleases rather than upsets the community.“

“For the industry as a whole, the predictability of developments is important. So far, control is less frightening than the seesaw in the prospects for regulation of the industry that we have seen recently. The mining business continues to assume a larger scale at its own risk, and further development will require investments that need a stable economic background and a clear legal framework. Large and medium-sized players are already not interested in working in the gray zone since they have something to lose and the risks are too great.”

Dmitry Machikhin, investor and entrepreneur, CEO of BitNalog also believes that the success of mining legalization directly depends on the conditions that the Regulator will offer miners. Under favorable circumstances, it is beneficial for miners to work officially, not be afraid of fines, pay taxes and have judicial protection. In this case, the market will become favorable for investment.

Vladislav Akeliev, Director for Development of ECOS cryptocurrency investment platform, is sure that a large number of investors and miners have been waiting for legalization because it reduces the risks of this business. The expert added,

“It is important to understand to what degree the State, by this legalization, implies control and creation of difficulties for data centers. If the goal is only to take the industry out of the gray zone and save investors from unnecessary risks, then this initiative will be warmly received by the community. Fraudsters here, as everywhere in life, are only a small percentage.”

State support for mining cryptocurrencies

It is observable that the State has taken a course towards the legalization and regulation of mining and cryptocurrencies. However, in order for Russian miners not to leave the market, the activity needs significant support, especially considering the fact that against the backdrop of sanctions imposed by the US and the EU, many mining pools are beginning to gradually stop working with Russian users. Among them is the largest pool

Many MPs advocate that it is necessary to develop and support the cryptocurrency industry in the country. For example, Alexander Yakubovsky, a United Russia parliamentarian from the State Duma Committee on Construction and Housing and Utilities, has repeatedly stated that Russia has all the resources for the development of the mining industry. He also has emphasized that the competent development of digital financial assets will significantly minimize the damage from sanctions.

The Ministry of Finance and the CSR (Center for Strategic Research) did not stand aside, either. CSR experts carefully studied the proposals of the Ministry of Finance to regulate mining and put forward their own measures. All their ideas were detailed in the report How to Regulate Mining in Russia?. It provides answers to the most pressing questions about the mining of digital assets, and offers solutions to the negative effects generated by mining, taking into account current regulatory proposals. In general, the CSR supports the proposals of the Ministry of Finance, which advocate the regulation of cryptocurrencies and the creation of a special register of professional miners. CSR experts also support the approach proposed in the bill of the Ministry of Finance to focus on the criterion of exceeding the energy consumption limit in order to qualify miners as entrepreneurs, although this departs from the common definition of entrepreneurial activity.

As you can see, some work is already underway. But where may this lead? We asked the experts, if we talk about the ideal scenario, what are the main problems of mining in Russia that regulation and State support for the mining of cryptocurrencies can solve.

Igor Zakharov, CEO of DBX Digital Ecosystem, believes that active discussions about the development of mining in Russia show the interest of the authorities to quickly solve the existing problem. While the Central Bank opposes the promotion of the cryptocurrency business, the Ministry of Finance proposes to improve the legislative framework so that miners can legalize, pay taxes, and generate income for the State. The discussion between the Regulator, the Ministry of Finance and the expert community of crypto enthusiasts has not yet brought tangible results. So far, a roadmap has been developed to regulate the relationship between miners and the State.

He also noted,

“The Ministry of Economic Development of the Russian Federation suggests that mining be allowed in regions where there is a surplus of energy capacities. Experts also believe that it is necessary to provide mining companies with more favorable electricity rates. According to the roadmap, miners are viewed similar to ordinary businessmen and must pay taxes on general terms when withdrawing fiat money.

“Deputy Prime Minister Alexander Novak is sure that clear laws on cryptocurrency will bring a solid profit to the budget in the form of annual tax revenues. Without a doubt, there will be those who prefer to work in the gray zone, but most mining companies will operate legally.”

According to the expert, the regulation of crypto business will open up a lot of new opportunities for crypto enthusiasts. For example, the State will make it possible to pay for electricity used in mining at more favorable rates. Mining clusters may appear in northern regions, where equipment cooling requires a minimum of energy consumption. Many miners from the Russian Federation will prefer to work in the country if the State shows its interest and offers clear rules for the relationship between crypto platforms and government agencies.

Vladimir Gorgadze said concerning this matter,

“At the moment, Russia is one of the three leaders in mining in the world. Since most of the electricity consumption is in the gray zone, this does not allow energy companies to plan and distribute capacity efficiently. Appropriate laws and legalization of mining activities will help in solving this problem for both parties. The Ministry of Energy has already proposed to introduce regional mining quotas. In this case, energy companies will be able to provide certain preferences to miners when planning, and they, in turn, will be able to work in the legal framework, for example, enter into contracts and hire staff legally. In addition, this will allow to carry out activities not in a makeshift manner, fearing risks from the Regulator, but to optimize both the mining process, including with its own developed software, and the process of further use of digital currencies. And thanks to this, new Russian developments in DeFi, cross-chain solutions, and optimization solutions for mining algorithms (creation of their own pools) may appear.”

Stanislav Akulinkin, speaking about what problems the legalization of mining can solve, first of all noted that today in Russia there are about 300 thousand individuals and organizations engaged in mining activities. This is profitable, so most of them want to increase their capacity and work in a completely legal framework.

Many problems, however, arise along the way: restrictions on allocated electric power, uncertainty about electricity tariffs, safe placement of equipment, conversion of mined cryptocurrency into rubles, attraction of investment financing, taxation issues, and determination of the source of earned monies. According to the expert, the legal regulation of mining activities will solve these problems and create conditions for the further development of the industry.

Dmitry Machikhin noted that the regulation of mining, first of all, would allow keeping records of expenses taken into account in the taxable base. So, miners would feel that to pay taxes was sensible. Legalization would also allow household mining and define criteria of mining as a hobby. Judicial protection and a precise algorithm for interaction with the State and the banking system were also important.

Andrey Tugarin identified the following problems that the legalization of mining in Russia should solve,

“First of all, this is the creation of the legal status of mining. It is equally important to determine how to pay taxes, taking into account the costs of, for example, electricity, purchase and maintenance of equipment. The development of a clear and understandable taxation will simplify the interaction of miners with government agencies. Legislative regulation of mining should also decide whether mining is an entrepreneurial activity and whether it is possible to mine without registering as a sole proprietor and/or a self-employed person.

“And vice versa, is it possible to use the status of a sole proprietor and / or self-employed for mining? It is not easy for miners to interact with resource companies because it is not clear at what tariff (for individuals or for organizations) they should be provided with electricity. Some supply companies simply refuse to work with them.

“As a result, the legalization of mining as an entrepreneurial activity will contribute to the development of the entire mining industry and all economic processes associated with the production of cryptocurrencies.”

Dmitry Noskov believes that if the mining of digital assets were legalized, miners would not have to engage in this type of activity illegally. It would be possible to indicate mining as a legal type of labor activity with the accrual of pension and seniority, and miners could provide data on their income, for example, to a bank for loans. The expert also noted that more favorable electricity tariffs would make cryptocurrency mining more profitable by reducing the financial costs of miners.

Egor Abramov believes that a clear system of regulation and legalization will help bring cryptocurrency out of the gray zone and allow it to be used as an analogue of foreign currency or precious metals, that is, as a means of storage, divisibility and transfer [of wealth].

The expert also gave a simple example, saying,

“Now any cryptocurrency owned is a black box. No one knows from what source the person got it. Maybe he bought it from a criminal or a terrorist, or maybe from an honest seller. The cryptocurrency that the miner mined legally (and for which he paid taxes) is the purest cryptocurrency. And then everyone can safely buy it from this miner and continue to use it. And any bank can easily track and confirm the "purity" of the origin of the cryptocurrency.”

Vladislav Akeliev takes an alternative point of view. He believes that regulation would most likely be an unnecessary measure. Legalization will take investors out of the risk zone and the level of stability in the industry will increase many times over. All this, combined with government support, maycan attract a large number of new investors, who move from one country to another in search of a safe place to install equipment. This could help the country in the current difficult situation.

Timofey Semyonov is sure that the regulation and State support of mining will be useful for balancing the energy system. He says,

“Now, especially in the Irkutsk Region, there is a serious problem of mining due to a cheap tariff for the population, which contributes to direct damage to energy companies, as well as a violation of electrical and fire safety when connecting and operating energy-intensive equipment to electrical networks that are not designed for this. The adoption of the regulation will facilitate the construction of a new energy grid infrastructure in Russia or the modernization of the existing one, as well as the construction of professional data centers, which in the future can be converted and used not only for mining. At the same time, related industries will develop, additional transparent taxpayers and new jobs will appear, which will contribute to the development of regions with a surplus of electricity.”

Aziz Kenzhaev identified a number of problems that regulation and legalization of mining can solve, as well as the benefits that will open up for miners, and among them:

  • Discounts for electricity consumption specifically for this activity;
  • Setting fixed tariffs for electricity consumption, which are likely to be lower than commercial ones;
  • State support for the miners who launch their activities in developing regions such as the Far East, etc.

Georgy Rakhaev shared his thoughts with the readers of our magazine, saying:

“In the most ideal case, mining can become a legal, secure and hassle-free business. But this is ideal. In practice, we are most likely to face an insufficient level of thoroughness of regulatory solutions, which, in turn, will lead to an outflow of miners from Russia. Do not forget that mining is a rather mobile form of business and it is difficult to control it.”

Danatar Atajanov believes that it is not even worth talking about State support in this context. With clear regulation of the industry, business will be able to support itself. Now there is a high interest from investors both from the West and from the East. Russia continues to be a promising place for the development of mining due to such factors as climate, infrastructure, personnel, availability of free energy capacities, and the cost of electricity. The main problem of mining is the lack of a transparent regulatory framework that clearly defines mining as a sphere of economic activity and, accordingly, the inability to conduct a completely legal business and pay taxes on earned cryptocurrency. The current situation forces more or less large players to resort to such solutions as hashrate export to other jurisdictions with the possibility of receiving fiat money for the sold computing power.

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